How to slash electricity prices … in just five minutes

A decision next week that could influence future of battery storage and peaking gas plants will be a major test of market rule maker’s ability and desire to keep the energy oligopoly in check. And new evidence has emerged on why the change is so badly needed.

Next week, the Australian Energy Market Commission – the national rule maker – is expected to deliver its initial verdict on a call to change the settlement period for Australia’s wholesale electricity market, a move its supporters say will lead to a significant reduction in prices.

It’s a decision that could precipitate a major swing point in the evolution of Australia’s energy markets. If the settlement period is changed from 30 minutes to 5 minutes, to align with dispatch, supporters say, it will prove a big incentive to install fast response technologies such as battery storage and demand response.

Opponents, on the other hand, say it will cause significant disruption, because the loss in revenue will cause peaking gas plants to close, leaving the security of the grid exposed. In effect, they agree that the rule change will reduce costs, but insist the impact (on their assets), will outweigh the benefits.

It is, in many ways, the biggest test of the regulatory oversight of the National Electricity Market in years.

Fossil fuel generators have fought vigorously against any sort of initiative that would impact their revenues – carbon price proposals, energy efficiency policies, renewable energy targets, demand response mechanisms and the introduction of rules such as the 5-minute settlement.

All have been resisted on the basis that the costs (to them) outweigh the benefits (to everyone else). And their ultimate fall-back? If you do this or that, then the lights might go out.

It is now clear that policy-makers can no longer allow themselves to be blackmailed in such a way – the current state of the electricity market, with its soaring prices, and the old, clunky and unreliable state of much of its generation – puts their own political future and the country’s economic future at risk.

South Australia has shown the way forward with its much discussed energy plan – whose primary purpose is to ensure that the power supply is not beholden to the vagaries of the markets and the whims of the powerful oligopoly.

In its submission to the Finkel Review, it accused the fossil fuel generators of “trading in scarcity” – effectively withdrawing capacity to manipulate markets. It said many generators were operating “far below their capacity, only offering electricity to the market for a very high cost.”

The 5-minute rule is equally important. The proposal asks that the settlement period on wholesale electricity market be changed from its current 30-minute period to 5 minutes, so it matches up with the 5-minute “dispatch” period, and removes the incentive of bidding up prices in one five-minute period, so that the benefits are averaged over the whole 30 minutes.

The decision is seen as a big test of the AEMC’s ability to shift with new technologies, and open the way for new competitors. The market operator and the regulator both support the shift, as do many large energy consumers and, of course, the battery storage industry.

A perfect example of exactly how the market is being played by the fossil fuel generators was revealed in a new report from the Australian Energy Regulator this week. It is hard to find another more obvious reason for a change in the rules.

It occurred on February 2, in Queensland, when the Callide C and Alinta’s Braemar A power stations rebid significant amounts of capacity and prices jumped to $13,400/MWh and above in one five minute period.

Five minutes later, the price was back down again as the market was flooded with capacity that suddenly became available. Generators were so desperate to get some of the action that they bid the prices down to minus $1,000/MWh, (see table bottom) knowing that they were guaranteed a price of $1,740/MWh set by the first five minute period.

This is not an unusual ruse. When a very high price is established for one 5 minute period it guarantees a good price for the whole 30 minute period. So after a spike, you inevitably a rush of “cheap capacity” suddenly becoming “available” so the other generators can cash in.

As the AER notes:

It is not unusual for generators to seek to increase revenue by rebidding capacity to low price bands to facilitate higher dispatch levels during the high priced trading interval, for example in the 1.30 pm trading interval. The 1.05 pm dispatch price reached $13 400/MWh, meaning the 1.30 pm spot price was guaranteed to be at least $1400/MWh. By the second dispatch interval, 632 MW of capacity was moved by eight participants from high to low prices, this can be seen in Figure 2 by the increase in the bottom green section after a price spike.

And this the graph they are referring to. Not the green on the right hand side when the capacity rushes back in to grab a share of the spoils.

Dylan McConnell, from the Climate and Energy College in Melbourne says: “This is absolutely an artefact of the 30 minute settlement rules – and it creates problems for the interconnectors too.

That’s because it can result in a sudden flows in one direction or another as capacity is withdrawn or suddenly made available.

He cites this example below, at 4:05 pm (just before a price spike) Queensland is importing about 100MW… but by the the end of the trading interval (i.e. 4:30) after the price spikes, and everyone rushes in – Queensland is exporting about 500MW.

Then it drops back down to importing 100MW in the next dispatch interval. That is, Queensland, with a settlement price of $2314.86 – is exportting to NSWm with a settlement price of $89.04. (this is called ‘counter price flow’).

That actually costs AEMO, the market operator, and ultimately the consumer, money (since they have to pay the output of the generators in Queensland their output at $2314, and sell that output in NSW for $89).

And the networks flows, and the constraints that are put on them by the operator to ensure grid stability, are another plaything for the fossil fuel generators – as we reported here when Origin and Snowy bid down prices, forcing Victorian competitors out of the market – and so finding themselves free to push prices back up towards the market cap.

That’s another story. But it makes an absolute mockery of comments such as those from the former head of the Productivity Commission, Gary Banks, who told an AFR conference this week that “the energy crisis is self-evidently not the result of market failure but of government failure.”

He added: “The inconvenient truth is that the increasingly high prices for increasingly unreliable electricity are a direct consequence of the increasingly high utilisation of renewable energy required by government regulation.”

Tragically, the economists at the AEMC appear to agree. Next Tuesday’s ruling will be a test of whether they are listening to the pleas of COAG ministers and everybody else seeking to release the stranglehold over the markets by the fossil fuel generators.

Giles Parkinson is founder and editor of Renew Economy, and is also the founder of One Step Off The Grid and founder/editor of The Driven. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

Giles Parkinson is founder and editor of Renew Economy, and is also the founder of One Step Off The Grid and founder/editor of The Driven. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

25 Comments

Just_Chris 2 years ago

“the energy crisis is self-evidently not the result of market failure but of government failure.”

One of the things with blame is that everyone assumes that “someone” is to blame rather than “somemany”. The problems in the NEM are not the fault of one individual they are a collective failure of most of the large institutions in the energy space and the fault of the general population for not caring.

There will be costs in the change (not insignificant) and there will be benefits (also not insignificant) – plus there are also unknowns (e.g. in terms of what new bidding behaviours might emerge as participants do we expect participants should in any market – try to optimise the value they deliver, and hence receive).

Ian Porter 2 years ago

As to the peaking generators complaints that their “plants will close”: that represents a good deal for government owned networks to buy up peaking/back up power plants at highly discounted prices and run them on the rare occasions that they are needed.

james gibson 2 years ago

I think regulating productive enterprises into unprofitability then “buying” them up is the stuff of banana republics.

Ian Porter 2 years ago

So you believe in regulating them into profitability? Nuts. In this case, It’s not about the regulation that would drive them anywhere, it’s about the reality of technical circumstancial change and calling them to the negotiating table. If they threaten to close the business because they can no longer gouge, then so be it .. welcome to the world of Uber, Air BnB and the like, challenging the business models of conventional taxis and hotels. Smell the coffee and end the rip off.

neroden 2 years ago

I think regulating unproductive enterprises (run by CEOs who donate campaign funds to the current government) into artificial profitability is the stuff of banana republics. Think about it.

Martin Sevior 2 years ago

Ian, it’s one thing to pay the capital cost of the plants. It’s another to pay the people you need to operate them when they’re needed. After you fire someone you can’t bring them back for the 10% of the time you need to run the plant. You’d have to look at the numbers in detail to know how much you’re willing to lose per year to make sure we have enough capacity for the ~ 10 days per year of really excessive demand. Hmm I seem to making an argument for more battery and pumped hydro and the shutdown of peaking fossil fuel plants 🙂

neroden 2 years ago

Well, y’know, you actually kind of *can* bring them back for the 10% of the time you need to run the plant, if it’s a simple-minded enough plant. You don’t have permanent staff standing by on your emergency diesel generator, do you? No, someone whose main job is something else works overtime.

You can do the same for the peaking plants if the peaking plants are used only a few times a year.

George Darroch 2 years ago

What powers do the ACCC have to investigate this behaviour?

Chris Fraser 2 years ago

I had Gary Banks’ opposite thought. The 5 minute settlement period appears to favour fast-responding generation (Hello batteries, hydro and load-levelling storage). Therefore, these and the ‘unswitchable’ old generators (baseload generators for conservative folk) are about to enter a period where they will struggle to coexist on the NEM. Clearly, the newer technologies will be built.Perhaps we should accept there are few opportunities for competitive services and generation in a monopoly grid where the wholesale price is not local and set every 5 minutes in one place.

David leitch 2 years ago

My bet, based on reading of the position papers, is the AEMC is going to come down in favour of 5 minute settlement.

Mick 2 years ago

Agreed – but the question (…as it sort of always has been) – is not so much if, but when. Perhaps the AEMC might come down in favour … but implement in 3+ years time.

humanitarian solar 2 years ago

The Senate agreed to the 5 minute rule so it’s a test of democracy. If the AEMC rules against the citizens of the country, politicians need to intervene to change the fundamental policy platform the AEMC operates upon. Democratic processes established the AEMC and democratic processes can end it.

George Michaelson 2 years ago

In all seriousness, why would AEMO not pick ten, fifteen or twenty? Reducing the opportunities to speculate don’t have to go to zero if risk/reward is a concern.

I don’t favour anything but five, but I wonder why nobody mentions their ability to equivocate.

chrgordon27 2 years ago

From the AEMC Working Paper no. 2 on the rule change: “Some stakeholders have suggested that dispatch and settlement could be aligned at an interval other that 5-minutes, such as 15-minutes, 30-minutes, or even 1-minute. For example, the dispatch interval could be increased to 15-minutes and trading interval reduced to 15-minutes. We have not considered any changes to intervals other than moving the trading interval to 5-minutes. In comparison to 5-minute alignment, alignment at other intervals would involve much larger changes and are therefore less likely to provide a net benefit to the market. For the purposes of the discussion in this paper, the implementation being explored is assumed to be 5-minute alignment.”http://aemc.gov.au/Rule-Changes/Five-Minute-Settlement

Tom 2 years ago

Great article.

I knew the market as it currently stands is crazy, but I didn’t quite know it was THAT crazy! Wow!

Imagine if this is how auctions for boxes of prawns at the fish markets worked.

GregS 2 years ago

I’ll bid negative $1,000 on the prawns!

Tom 2 years ago

They’d sell it too you too, knowing that despite your bid you’ll end up having to pay $1800 for it.

Rob 2 years ago

What a bunch of suckers we are! If we don’t insist on this being changed immediately we deserve to be ripped off.

RobSa 2 years ago

In theory we (all humans) could have access to free unlimited electricity. But what would that mean for society?

“the energy crisis is self-evidently not the result of market failure but of government failure.”

Tangentially, I have a possible solution or interesting suggestion for readers of RenewEconomy. FOI requests to verify the following. All around the world in government department records, mostly correspondence sent by citizens regarding energy development sits idly. They draw pictures, make bizarre suggestions and send in both detailed technical explanations of their ideas and broad concept and outlines. People do this thinking that the government can act upon the information; to bring products to market. But they can’t so the documents just get filed away. Over the years these documents get archived and disposed of. Imagine an electrical generation idea that just happened to be brilliant but never discovered because nobody who was knowable read it? I know it happens and as far as I can tell its likely to happen all around the world.

Whilst the arguments in favour of moving to 5 minute settlement are quite compelling, the impact of inter-regional counter price flows is a minuscule impact, if any on consumers. A counter price flow in one half hour will be netted off against the roughly 4300 half-hours in a quarter that are not. This reduces the value of settlement residue owned by either a market participant or defaults to reducing the discount on transmission charges the market pays. It’s a difficult concept to explain in a comment but more detail can be found here (https://www.aemo.com.au/-/media/Files/PDF/Guide_to_the_Settlements_Residue_Auction_July_14.pdf)

Ray Miller 2 years ago

I see when the 5 minute rule is implemented many of the existing players will install fast response equipment, be it in many forms to make sure they do not loose their advantage. If I were them I’ve approached the battery/inverter manufactures for a bulk deal. But then we are back where we started, without an energy plan and leaving it up to a failed market model.

“A directions paper will be published on 11 April 2017 setting out the Commission’s initial positions on the key issues raised in the rule change request.”

Looks like another deadline has been missed. Was originally 30/3, then updated on the AEMC website to today. As I write this (5:30pm), still nothing. It looks like they are going to be burning the midnight oil over at the AEMC…